Semester 1 2012/13

Jim OHare
Principal Teaching Fellow
Astley Clarke Room 106 jo88@le.ac.uk

Office Hours Thursday 4p.m. 6p.m.

Learning Outcomes
Functioning of the financial reporting system
Components of financial statements and how they are

related Relevance of information in company financial statements Use of financial ratios How to value a business Ethics and professional standards for financial analysts

Principles
UK GAAP or IAS
Objective of financial statements Qualitative characteristics

Definition, recognition and measurement

Objective
The objective of

financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions
IASB Framework

Underlying assumptions
Accruals basis
Going concern

Qualitative characteristics
Understandability
Relevance

Materiality Reliability Faithful representation Substance over form Neutrality Prudence Completeness Comparability- Time Other entities

Elements of Financial statements

To measure financial position in the balance sheet

Assets Liabilities Equity

To measure financial performance in the income

statement (profit and loss account) Income Expenses

Assets
Resources controlled by an entity as a result of past

events and from which future economic benefits are expected to flow to the entity Controlled, not necessarily owned Future economic benefit = the potential to contribute directly or indirectly to the flow of cash to the entity

Liabilities
Present obligations of the entity arising from past

events, the settlement of which is expected to result in an outflow from the entity embodying economic benefits Obligation = a duty or responsibility to act or perform in a certain way Settlement will involve giving up resources to satisfy the claim of the other party

Equity
The residual interest in the assets of the entity after

deducting all its liabilities Assets Liabilities = Equity

Income and expenses

Income = increases in economic benefits during an

accounting period in the form of inflows or enhancement of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants Expenses = decreases in economic benefits during an accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Statement of financial position

Assets
Non-current Assets Current Assets

Equity and Liabilities

Equity Non-current liabilities Current liabilities

Non-current Assets
fixed assets
Tangible - Property, Plant and Equipment Goodwill

Other Intangible Assets

Available-for-sale investments

Depreciation
Is a technique used by accountants to spread the cost

of a fixed asset over its useful life Not an attempt to reflect value Different company accounting policies will give different amounts for the same asset!

Depreciation example
Straight Line p.a. Cost 1.7.10 31.12.10 Depn 31.12.11 Depn 31.12.12 Depn Book value at 31.12.12 100,000 10,000 20,000 20,000 50,000 Straight line (full year) Reducing balance p.a. Reducing balance (full year)

Assumes a life of 5 years for the asset and a reducing balance rate of 25%

Depreciation example
Straight Line p.a. Cost 1.7.10 31.12.10 Depn 31.12.11 Depn 31.12.12 Depn Book value at 31.12.12 100,000 10,000 20,000 20,000 50,000 Straight line (full year) 100,000 20,000 20,000 20,000 40,000 Reducing balance p.a. Reducing balance (full year)

Assumes a life of 5 years for the asset and a reducing balance rate of 25%

Depreciation example
Straight Line p.a. Cost 1.7.10 31.12.10 Depn 31.12.11 Depn 31.12.12 Depn Book value at 31.12.12 100,000 10,000 20,000 20,000 50,000 Straight line (full year) 100,000 20,000 20,000 20,000 40,000 Reducing balance p.a. 100,000 12,500 21,875 16,406 49,219 Reducing balance (full year)

Assumes a life of 5 years for the asset and a reducing balance rate of 25%

Depreciation example
Straight Line p.a. Cost 1.7.10 31.12.10 Depn 31.12.11 Depn 31.12.12 Depn Book value at 31.12.12 100,000 10,000 20,000 20,000 50,000 Straight line (full year) 100,000 20,000 20,000 20,000 40,000 Reducing balance p.a. 100,000 12,500 21,875 16,406 49,219 Reducing balance (full year) 100,000 25,000 18,750 14,063 42,187

Assumes a life of 5 years for the asset and a reducing balance rate of 25%

Current Assets
Inventories (stock)
Trade Receivables (debtors) Other Current Assets

Cash and cash equivalents

Equity
Share Capital
Retained earnings Other reserves

Liabilities
> 12 months = non current
Borrowings Trade and other payables (creditors)

Tax payable/deferred tax

Provisions Contingencies

Next plc Balance Sheet as at 28 January 2012

ASSETS AND LIABILITIES Non-current assets Property, plant & equipment Intangible assets Interests in associates Other investments Defined benefit pension surplus Other financial assets Current assets Inventories Trade and other receivables Other financial assets Cash and short term deposits Total assets notes 11 12 13 14 23 17 2012 m 581.9 45.6 6.1 1.0 35.1 44.6 714.3 371.9 699.1 12.5 56.4 1,139.9 1,854.2 2011 m 592.4 46.5 5.1 1.0 55.7 24.3 725.0 368.3 645.6 4.1 49.3 1,067.3 1,792.3

15 16 17 18

Current liabilities Bank loans and overdrafts Trade and other payables Other financial liabilities Current tax liabilities Non-current liabilities Corporate bonds Provisions Deferred tax liabilities Other financial liabilities Other liabilities Total liabilities Net assets

19 20 21

(7.6) (545.0) (87.0) (102.8) (742.4)

(125.2) (544.6) (54.7) (108.4) (832.9)

22 24 8 21 25

(652.1) (12.0) (15.4) (4.4) (205.2) (889.1) (1,631.5) 222.7

(471.2) (13.3) (23.4) (2.6) (216.5) (727.0) (1,559.9) 232.4

EQUITY Share capital Share premium account Capital redemption reserve ESOT reserve Fair value reserve Foreign currency translation reserve Other reserves Retained earnings Shareholders equity Non-controlling interest Total equity

26

27

16.9 18.1 0.8 0.8 13.0 11.8 (141.1) (138.6) 11.5 (3.2) 2.0 4.6 (1,443.8) (1,443.8) 1,763.4 1,782.6 222.7 232.3 _0.1 222.7 232.4

Next plc Income Statement for the year ended 28 January 2012
Notes 2012 m 2011 m

Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other gains Trading profit Share of results of associates Operating profit Finance income Finance costs Profit before taxation Taxation Profit from continuing operations Profit from discontinued operations Profit for the year

3,4

5
13 5 7 7 8 2

3,441.1 3,297.7 (2,395.8) (2,332.6) 1,045.3 965.1 (245.7) (223.2) (201.3) (179.1) 2.0 2.2 600.3 565.0 1.5 1.8 601.8 566.8 6.6 0.9 (28.9) (24.3) 579.5 543.4 (145.3) (150.3) 434.2 393.1 40.6 7.8 474.8 400.9